Commentary: Democrats Do Need to Get Serious on Pension Reform

calpers-buildingA few days ago, Republican Senators Bill Emmerson (Hemet), Tom Berryhill (Modesto), Anthony Cannella (Ceres) and Tom Harman (Huntington Beach) wrote an op-ed in the LA Times, pushing for their public employee pension reform legislation.

They discussed Senate Constitutional Amendment 13, which “resulted from last year’s failed negotiations with Gov. Jerry Brown over the reforms we sought and that  California desperately needs — including pension reform.”

They write, “Having discussed pension reform with Brown last year, we knew there was much agreement between the governor and ourselves; SCA 13 reflects that agreement. It was clear to us that he supported virtually every tenet of our proposal. Regardless of the lost opportunity for Democrats to negotiate a meaningful budget, Brown assured Californians that he would bring his pension reform ideas forward.”

And they add: “When the governor finally introduced his pension reform language a few weeks ago, none of us were surprised that it virtually mirrored SCA 13. Unfortunately, legislative Democrats have refused to set either measure for a policy hearing, effectively shutting down discussion on real reforms.”

They also add: “As a group, we withstood a tremendous amount of pressure by some within our party simply because we engaged the governor. In fact, it didn’t faze us when Brown’s spokesman called legislative Republicans ‘basically moronic’ on a radio show last year; rather, we kept our eyes focused on finding solutions to some of California’s biggest issues.”

I think they are largely correct here, Democrats do need to get serious on public pension reform, for three primary reasons.

First, public pensions are crippling the cities.  The combination of state raids on local money and the burden of public pensions threaten to push more than a few cities toward the path of Vallejo and bankruptcy.

The irony is that many of the communities in most danger are led by Democrats.  And yet, as many critics are quick to point out, Democrats at the state level are beholden to public employee unions, and public employee unions are acting in a very narrowly defined self-interest.

In the immediate term, current employees may benefit from the current system, but in the long term, they will benefit from reforms that will bolster the pension system, keep it and cities solvent, and prevent draconian solutions from emerging.

It is this point that I tried to argue – futilely – with several members of the California Labor Federation in a meeting I had in Sacramento back in 2009.  At that time, I was told in no uncertain terms that I was to back off from criticizing the firefighters or pushing pension reform.

They argued that it was firefighters, who along with nurses and teachers, helped them roll back in 2005 efforts by Governor Schwarzenegger to harm pensions and curtail the power of unions.  Ironically enough, it was in 2005, that my wife, a labor organizer, was fighting in the same lines as Davis Firefighter Association President Bobbie Weist.

The problem is that the arrangement that firefighters and other public safety employees have – retiring at 50 with 3% of their final pay that can be manipulated and spiked – coupled with the $100,000-plus salaries, is precisely what is crippling the system.

The typical public employee who receives 2% at 60 and makes about $27,000 in pensions is not the problem.

If Democrats were to step up they could save the public pension system.  If they resist, and cities go bankrupt, the public will reach a breaking point and we will end up with the Proposition 13 of pension reform – something that fixes problems in the pension system that do not exist.

That was my chief concern in 2009, and remains my chief concern now.

The fact that a group of Republicans are willing to go along with the governor’s pension reform proposal means that we are still operating in a space where the essence of pension reform can be achieved, while preserving the defined benefits system.

If we lose that, then the world changes drastically.  I do not support either a defined contributions system or even a hybrid system.  It moves too much of the risk onto the lower-tiered employees.

In a recent analysis by the California Public Employees’ Retirement System about the hybrid system: “The proposed hybrid plan is expected to result in a shifting of risk from the employer to the member.”  They add: “The member is expected to see an increase in risk because the defined contribution portion of their benefit is not guaranteed and accordingly will be exposed to investment return volatility.”

Some may wonder if that is not what they want, since the employer would see “a smaller” and “less volatile defined benefit.”

However, “CalPERS argues that the lowered risk for an employer ‘does not necessarily mean lower cost.’ ”  They add, “Even though the total retirement benefits provided to the member by the proposed hybrid plan are lower than those currently in place, the expected savings are generally not significant and for the State plans, cost increases for some plans may largely offset cost savings in other plans.”

There is a caveat, “For local agencies, cost savings will vary significantly but are expected to be greater than for the State.”

For me, as well as many on the left, there is concern with a number of the points that the governor’s plan addresses.

The governor’s plan ends additional retirement credit purchases, ends retroactive pension enhancements and pension holiday, mandates that employees pay half the normal costs, limits the hours and wages for those who return to government work, calculates benefits based on a 3-year average rather than final salary, narrows the definition of wages to prevent spiking, raises the retirement age and sets a minimum length of service and age, among other things.

In short, I believe that the worst excesses of the pension system – spiking and lack of employees paying their fair share, along with lowered retirement age – are addressed by Governor Brown’s proposal and if we enact those portions, we can save the defined benefits system from itself.

However, if Democrats do not get serious about these changes, they may preserve the existing system for a few years, but ultimately they will lose the pension system altogether.  Those are the stakes in this battle, and Democrats are currently in denial.

As the Senators write, “The majority party needs to take up public employee pension reform in a meaningful and responsible way by giving SCA 13 and the governor’s pension reform proposal a true hearing.”

They argue, “SCA 13 seeks to address not only the ‘easy’ fixes we all agree on, such as spiking and double dipping, but also addresses the underlying structural issues that contribute to the problems faced by state and local governments. Moreover, SCA 13 ends pension abuses, reduces our unfunded pension liabilities and controls costs to ensure the sustainability of our public employee pensions.”

While I do not agree on hybrid plans, I think their proposal is solid and deserves a fair hearing.  At least they are willing to work across the aisle.  As they note, “Accepting partisan gridlock as the status quo does nothing to fix California.”

I agree, it is time for the Democrats to get serious about public employee pension reform.

—David M. Greenwald reporting

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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24 Comments

  1. rusty49

    “Unfortunately, legislative Democrats have refused to set either measure for a policy hearing, effectively shutting down discussion on real reforms.”

    Is there any surprise here? Most of the Democrats are bought and paid for by the unions.

  2. E Roberts Musser

    [quote]While I do not agree on hybrid plans, I think their proposal is solid and deserves a fair hearing. At least they are willing to work across the aisle. As they note, “accepting partisan gridlock as the status quo does nothing to fix California.”

    I agree, it is time for the Democrats to get serious about public employee pension reform.[/quote]

    Amen!

  3. Mr.Toad

    But what did Brown get out of those negotiations with Republicans, nothing! So why would Dems want to work with Republicans on it now. Because it is the right thing to do? When did that ever move politicians. With no initiative on the horizon don’t expect much to happen.

    Brown’s proposal does fix some problems but it doesn’t touch the 3% for cops and firefighters, the black hole of pension liability for the state.

  4. J.R.

    [quote] Ironically enough, it was in 2005, that my wife, a labor organizer, was fighting in the same lines as Davis Firefighter Association President Bobbie Weist.[/quote]

    She was part of the problem. Hopefully she has realized the error of her ways.

  5. Mr.Toad

    Nice work if you can get it. Sadly, STRS only pays 1.4% at 55 growing to 2% at 60 and 2.4% at 62.

    Would I fight to keep it if teachers got 3% at 50. Of course I would. Am I jealous?

    Maybe but that is besides the point. The point is whether or not jerry Brown’s fix is going to work. As long as he doesn’t fix the public safety age factor its going to be hard to keep PERS solvent without changing the contributions from employees in a big way. I think he is already trying to raise the age of retirement for new hires and contributions by rank and file but will it be enough? That is the question.

  6. Rifkin

    [i]”Unfortunately, legislative Democrats have refused to set either measure for a policy hearing, effectively shutting down discussion on real reforms.”[/i]

    Keep in mind that Senate President Darrell Steinberg is the same fellow who black-balled Lois Wolk when she bucked him one time on one vote in one committee, regarding municipal bankruptcy. Steinberg removed Lois as chair of that committee, local government, and replaced her with a lackey of the fire unions. Lois was then taken off most of her other committee assignments, as ordered by the fire unions. (I should note that the fire unions put up a smoke screen that said that Lois was being punished for a water vote she took. Alas, that smoke screen failed when it was seen that her vote did not make a difference on water and she was kept on that committee.)

    Since Lois was punished by Steinberg, she has reformed herself. She has voted with Steinberg on all subsequent votes on municipal bankruptcy, and now state law is such that cities will spend 5 times as much to go through the bankruptcy process as was the case before the fire unions shoved their bill through and Brown signed it into law.

  7. Rifkin

    [i]”First, public pensions are crippling the cities. The combination of state raids on local money and the burden of public pensions threaten to push more than a few cities toward the path of Vallejo and bankruptcy.”[/i]

    You are now wrong about bankruptcy. The fire unions (see above) changed the game, there.

    You are–I think–also wrong to imply that the state needs to reform its pensions for the cities to act. The cities can act by themselves, now.

    [i]”Democrats at the state level are beholden to public employee unions, and public employee unions are acting in a very narrowly defined self-interest.”[/i]

    This has been true for the last 30 years. Before that, most public employees were not unionized. Ever since they became unionized, the cost of providing government services has gone through the roof.

    If you don’t believe me, look at the pre-union compensation paid in Davis in the 1970s and 1980s. Adjusted for inflation, they were 1/3rd of what we are paying today.

  8. Rifkin

    [i]”The typical public employee who receives 2% at 60 and makes about $27,000 in pensions is not the problem.”[/i]

    The average CalPERS retiree who worked 30 or more years gets a pension of something like $80,000 per year*, not $27,000, according to CalPERS. The number you are quoting includes many pensioners who worked as little as 5 years for a PERS-affiliated agency. (*I have a source for this with the exact number from 2010, but I will have to look for it.)

    [i]”… we will end up with the Proposition 13 of pension reform.”[/i]

    I wish that were the case. However, all of these folks who say they are going to put a pension reform initiative on the ballot keep failing. I think they need to get one rich dude to bankroll a signature-gathering drive. They have not yet done that and I don’t see it happening until some rich guy makes it happen.

    [i]”The governor’s plan ends additional retirement credit purchases, ends retroactive pension enhancements and pension holiday, mandates that employees pay half the normal costs, limits the hours and wages for those who return to government work, calculates benefits based on a 3-year average rather than final salary, narrows the definition of wages to prevent spiking, raises the retirement age and sets a minimum length of service and age, among other things.”[/i]

    We can get all of these provisions in Davis without state action. In fact, we have some of them already.

  9. medwoman

    A question for all that I have not seen anyone address. To know whether we are paying too much or too little in terms of retirement, it would seem to me that the question is not, what does some other group get, but rather how much does one need for a comfortable retirement? This, to me, is what should be the goal. So Rich, or Don, or anyone better versed in economics than I am, what is your projected response to this question, and how would you get to that amount ?

  10. Rifkin

    I need to make this clear: I am not against Brown’s plan. It’s a modest proposal. It will make a small difference for the state budget*. But I don’t think it matters at all when it comes to what we are facing in Davis. We have to push through our own reforms; we have no need to wait for the state Democrats to act.

    *As you have pointed out in the past, David, direct employee compensation is not the bulk of the state’s budget, since so much of the money goes to the school districts and to higher education. The K-14 schools and the CSUS and UC systems then have their own compensation problems when spending money given to them by the state.

  11. Rifkin

    [i]”To know whether we are paying too much or too little in terms of retirement, it would seem to me that the question is not, what does some other group get, but rather how much does one need for a comfortable retirement?”[/i]

    There is no possible way for me to say what is comfortable for someone else.

    [i]”This, to me, is what should be the goal.”[/i]

    I think you need to keep this in mind, MEDS: If the average retiree says he needs $9,000 per month to be “comfortable,” the end-result will be that we can afford far less in government services. That means at the county level, we will provide less medical care for the homeless and others who are living in poverty. We will have fewer visiting nurses. We will have less money for psychiatric care for the poor mentally ill. At the state level it means a higher education will be less affordable or in some cases no longer affordable. It means we will have to close and not maintain more state parks, which used to be an affordable place for families with kids to vacation or spend the weekend in the summers. At the school district level it means larger class sizes and less in terms of art classes, music, sciences, woodshop, sports and so on. At the city level it will mean our roads and sidewalks cannot be fixed and some might be injured due to dangerous streets. It means we will have fewer cops on the beat and perhaps the police will not be able to respond to all emergency calls. And it might mean shutting down rec and health programs for kids and seniors.

    Certainly, if your priority with regard to government service is that the employees live well and retire comfortably, then you will be fine with a much reduced level of service. But that is the choice we face. The more we give away in compensation, the less government at all levels is able to do.

  12. Dr. Wu

    [quote]it would seem to me that the question is not, what does some other group get, but rather how much does one need for a comfortable retirement?[/quote]

    The little Hoover commission recommended capping pensions and I think the long term solution will involve some means testing. I do not remember the number but a significant number of CAPERS retirees have six figure pensions. That is obscene.

  13. Steve Hayes

    Because my wife is a former teacher and my younger daughter is a current teacher, I am aware that CALSTRS pensions are not coordinated with Social Security. This is an important factor for some in determining ultimate retirement income.

  14. Frankly

    medwoman:[i]”A question for all that I have not seen anyone address. To know whether we are paying too much or too little in terms of retirement, it would seem to me that the question is not, what does some other group get, but rather how much does one need for a comfortable retirement?”[/i]

    This really depends on how healthcare is covered. Setting that question aside for the moment, I would think it is reasonable to expect a person to have worked toward a plan of retirement that included significant expense reduction. For example, one having paid-off most debts including the mortgage.

    Toad: [i]Sadly, STRS only pays 1.4% at 55 growing to 2% at 60 and 2.4% at 62.[/i]

    I will tell you what is sad… all us private sector working stiffs that hear you public sector working stiffs are getting to retire by age 50 at 90% pay, or by age 62 at 72% of your pay… guaranteed for the rest of your life.

    I have a few questions for everyone that works in the private-sector… when do you plan to retire? Are you counting on Social Security as a significant part of your retirement income? What are you factoring for healthcare costs?

    Other questions…

    We all know the state and local public employee pensions are unsustainable, so why then aren’t politicians making the necessary changes? Do they think there will be another easier to swallow remedy down the road, or are they just shirking difficult tasks by kicking them down the road?

  15. Mr.Toad

    Jeff, the state teachers retirement system predates social security so we don’t get that either. We don’t have a 401 k plan although we can defer income through a 403b but there is no employer contribution to that. Just like you we can contribute to a roth. We pay 8% of our salary to our pensions the employers match that and the state kicks in a 4% match. This has been the contribution rate for a long time. Only when the fund is underfunded does the state bail out the fund as it is now due to the bad economy since the collapse of the housing bubble. Yet you don’t hear us complaining about the unfairness of 401k matches, bonuses (even for under performance), stock options or golden parachutes.

    It is disturbing the animosity towards defined benefit pensions I hear from people that don’t have one. As victims of the longest struggle in American history, management versus labor, blaming those who have managed to remain organized seems like the Stockholm syndrome. Just recently American Airlines filed for bankruptcy and wants to rob employees of their pensions. Where is your outrage about that!

    Calstrs has been around since before Social Security just as railroad pensions and military pensions have been as well, yet, I don’t hear you complaining about any of those programs. Public employees deserve a pension especially those who make large contributions from their checks in large part funding their own retirement. All of these programs have been around for a long time so why the seething hatred for something so well established as these other programs.

    This is not to say that there are not problems that need to be fixed as I and others have addressed but the notion that there is something immoral about public sector employees having defined benefit pensions is quite radical and offensive, particularly in an area near the state capitol with a major university where the public sector is such a large driver of the rest of the economy.

  16. hpierce

    [quote]how much does one need for a comfortable retirement?[/quote]Not my specialty, but I’ll try to directly answer the question w/o pontificating… the rule of thumb I’ve heard is that, from all sources of retirement income (SS, defined benefit pensions, income from 401(k), 403(b), 457, IRA, Roth IRA, whatever), a retiree can live comfortably @ ~ 80% of what they were making late in their carreer. Healthcare and (if needed) Long Term Care insurance costs (or, if no insurance, the actual costs) is the huge variable.

    The concept of retirement is pretty new… for most people, less than a hundred years old. Perhaps we should look at the concept of retirement. If you have to work until you are dead or unable to work, we could save tons of money on SS, public pensions, retiree medical (including Medicare), etc. If a person can save enough money, fine. By having no retirement provisions, society could better cover the costs of housing the homeless, feeding the poor, treating the mentally ill, and all of the other aspects of charity (meant in the good sense — a virtue). If someone was unable to work, society could (as money is available) assist them with basic food/clothing/shelter needs at a minimal level… basic survival. Interesting concept. Perhaps society should consider it.

  17. Frankly

    Toad:

    Thanks for the nice response. I learned something about the contribution breakdown. What about your healthcare insurance premiums, copays and out of pocket expenses? Do you contribute to any of that while you are working and after retirement kicks in?

    [i]”Just recently American Airlines filed for bankruptcy and wants to rob employees of their pensions. Where is your outrage about that!”[/i]

    You should be able to guess what I would say about this. First, a big reason that AA had to file for bankruptcy was their high labor costs including their pension liabilities. I am not outraged about AA demanding pension reductions. What I am outraged about is another case of a union bankrupting a company and causing younger AA workers to lose their jobs… and potentially ALL AA workers to lose their jobs.

    Today, with rare exception, defined benefit pensions only exist where the labor is unionized. They are simply unsustainable relics of the past. They are so for a number of reasons including longer life expectancies combined with worker’s expectation for earlier retirement ages. This lack of sustainability is exacerbated by decades of overly generous terms having been extorted by union-political power.

    Trust me; I understand how difficult of a job it is to reduce employee benefits. Workers tend to get angry and nasty when they feel like something is being taken away from them. It is largely a common emotional response and survival instinct for humans to want to protect themselves from feeling like they are progressing backwards. But once it is determined that expenses are unsustainable, leaders have to make the difficult decisions and do the hard work to implement the required reductions. Doing nothing or delaying are simply examples of failures of leadership.

    Here is my solution:

    -Replace all defined pensions with 401(k)/403(b) plans with an employer match.

    -Extend the retirement age.

    -Enact Federal law to make healthcare insurance and retirement plans portable.

    -Enact Federal law to allow health insurance companies to compete nationwide.

    -Encourage greater retirement savings through enhanced tax reduction incentives.

    -Shrink the size/cost of government; reduce tax rates, focus more on economic development to create a stronger, more robust and more dynamic economy that produces plentiful job opportunities.

    -With portable benefits and a more robust and dynamic economy, more workers should be expected to change employers/professions/careers during their lives so that work stays interesting and enjoyable… and better matches their work-life-balance requirements. Then working until 70 won’t be such a problem. Disability claims and sick days used will probably fall. Incidences of age-related illnesses will probably fall. There will be less negativity and crappy service lacking all the grumpy and burned-out workers just trying to hold on until their magic pension kicks in.

  18. Frankly

    [i]”If someone was unable to work, society could (as money is available) assist them with basic food/clothing/shelter needs at a minimal level… basic survival. Interesting concept. Perhaps society should consider it.”[/i]

    I would add this idea from hpierce to my list above to provide a needs-based minimum-level retirement for seniors unable to work or over the age of 70. That age will need to be moved up as life expectancy increases.

    However, the looters will start screaming at some point about the growing retiree quality of life gap and depand greater wealth transfer to poor retirees, which will then encourage fewer older people to work and more to claim health problems that qualify them for “base-line” benefits that now support a vacation abroad every few years.

  19. hpierce

    Jeff… may God forbid anyone from taking a vacation abroad, unless it is a private sector employee, on a tax-free expense account… or as a “company expense” which can be written off by a corporate entity. Public employees, overpaid/compensated, should never expect to see anything beyond driving distance. You rock, Jeff.

  20. Mr.Toad

    If you have 15 years of service most districts pay something towards your health care premiums until you can get Medicare. In one district I’m familiar with they pay 1/2 of the cheapest premium offered for a single person irrespective of how many are on your plan. The biggest benefit is being able to stay in the group.

  21. Frankly

    hpierce, I’m not surprised that that comment of mine caused a response like yours. I glad you did because I think it is an important one.

    A few points:

    I haven’t been able to so myself with all the work I have to do to pay the bills, pay for two kids to attend college while also saving 100% of what I need for my retirement.

    – I wrote “every few years”

    – A lot of American debt has been accumulated over the last few decades used for travel and vacations.

    – Middle class folk didn’t have anything close to this travel expectation a few decades ago.

    I know this is a drive for many people to retire young enough and with a large enough nest egg so they can “see the world”. I understand the desire, but it still comes down to a question of sustainable expectations. The “travel abroad” point in really irrelevant… I really don’t care what people do. The larger point is sustainable expectations. Save for it if you want it, I just don’t think it is fair to ask me to pay for it when it is likely I will not be able to afford it.

  22. Frankly

    hpierce, you do bring up a good point about private-sector business trips abroad with expenses that can be deducted. However, I wonder what we would find if we were to really count the percentage of public versus private sector business trips abroad. For example, UCD employees seem to quite frequently jet back and forth.

  23. hpierce

    Jeff… been to Canada once in my life… when I was 13. That’s it (but have a passport, just in case — always hopeful). There are abuses I’ve seen in the public sector, particularly when employees charge their overseas travel on their own credit card (reimbursed by agency) and keep the “frequent flyer miles” for themselves.

    Have a relative who frequently flies overseas as part of their job.

    Know of many public sector employees, who, in retirement, would like to see France, Australia, Italy, Ireland, or somewhere else at least once. In the “race to the bottom”, I think there are a bunch of folks out there that figure that if a public employee/retiree EVER gets to make even one such trip, that they are grossly overpaid (employee) or their pension is too generous (retiree).

    Perhaps we should keep salaries/pensions low enough so that a trip to Tahoe is extravagant.

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